Can retail giants make the Net pay?

By racing onto the Net, UK supermarkets are caught in a catch 22. The more successful online ventures become, the more they cannibalise store sales. Cynics argue it’s merely an attempt to woo City analysts.

Iceland, the 760-strong supermarket chain, is taking the Internet revolution to heart. While other supermarkets make a cautious entrance into the world of online ordering and delivery, the chain is going the whole hog and renaming its entire store estate Iceland.co.uk.

For smaller players such as Iceland, online sales can provide a boost to high-street operations, partly because its store estate is located in less sought-after locations than those of larger rivals. Marketing director Alan Shepherd says: “We don’t have to win the online war. If we are able to take a greater share of online shopping than our stores do in traditional retailing, that’s great. It will have been achieved with little capital investment. We are number three in online sales, behind Tesco and Amazon.com, and for us that’s just fine.”

Meanwhile, Sainsbury’s has purchased a stake in supply network GlobalNetExchange for £9.5m. The chain, which has been one of the slowest to take up the online torch, will join a linked supply network that already includes Carrefour and Sears. The network enables retailers to join forces and order in bulk to secure cheaper deals.

Sainsbury’s, which has appointed two e-commerce chiefs, is also rethinking its warehouse-based delivery strategy.

The move follows a damning report by retail research group Verdict Research that says most online retailers are providing a poor service.

But as the ink dries on Sainsbury’s new deal, and Net companies continue to launch so-called unmetered services, observers remain unconvinced that online grocery services are anything other than tokenism at best, and, at worst, a black hole for investment.

Paul Smiddy, an analyst at Credit Lyonnais Securities Europe, comments: “I don’t believe the re tailers are making money out of it.

“Tesco has gone down the pick-in-store route, yet, if the scheme takes off, it will cause major disruption in the stores. But a warehouse system is unlikely to survive at current sales levels.”

Another analyst says: “Supermarkets have decided that it is better to cannibalise their own sales than do nothing and let someone else come in.”

A problem for online services lies in the high cost of deliveries. Delivering perishable goods is a logistical nightmare, while it has proved almost impossible to satisfy customers, all of whom seem to demand evening or weekend slots.

Tesco has lost head of online marketing Helen Bridgett, who last week became chief executive of gardening Website Green fingers.com. She admits: “It is the eternal problem. We can only do our best to give customers a time as close as possible to what they demand.”

A marketing director at one major retail chain says: “A van can make a maximum of 200 deliveries a week. Customers have to spend a minimum of £70, with a £5 delivery charge, for a retailer to break even.

“No one is making any money based on that model.”

More significantly, observers are critical of retailers’ motives. The seismic effect e-commerce announcements can have on share prices is understood to have triggered exaggerated sales claims and statements of commitment to the new market.

One Sainsbury’s observer says: “When Sainsbury’s first entered into e-commerce, the thought at board level was: ‘We are struggling in our normal trading business, which is having an impact on our share price. The City is responsive to any entry into e-commerce, so let’s ensure we have a presence’.”

The source adds: “If online grocery sales are profitable, I haven’t seen any signs of it yet.”

Tesco Direct has been the subject of a number of highly-publicised announcements in the past few months. In January, chief executive Terry Leahy revealed an expansion of the service, saying the scheme would create 7,000 jobs by rolling out to a further 200 stores – bringing the total to 300 by the end of the year. He claims annual sales will reach £125m.

A former Tesco insider says: “Tesco wants to get into it very slowly, while giving the impression that it is doing a lot.”

However, Bridgett says the company is making 3,000 deliveries a week at an average of £90 per order. At that level, Tesco is achieving £14m annual sales.

The expansion plans would produce annual sales worth £42m, although Bridgett claims money is made from making existing resources work harder through the in-store system, and that in-store order sizes and sales will also grow. She insists Tesco Direct is profitable.

Yet analysts and observers are convinced that, for all the hype, the major supermarkets’ online efforts are, at best, defensive measures. One says: “The market is predicted to account for about seven per cent of grocery sales by 2005, worth about £12bn. But these sales will come straight from their own pockets. They must have an online presence – even if it runs at a loss – for their share price, and for retaining market share.”

Waitrose, which has a minimal store presence outside the South-east, is using its Waitrose@work service and Waitrose.com retail portal to generate sales beyond the reach of its estate. Marketing director Mark Price says: “Nearly 85 per cent of Waitrose@work customers are new to us, and 60 per cent of our wine service customers are outside our catchment areas.”

Price is less convinced about Sainsbury’s and Tesco’s efforts: “You’d have to say the big players are in it to be defensive. Some say the online market could account for 15 per cent of sales within five years. The question for retailers is: could you survive if you lost 15 per cent of your business?”

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